High frequency trading - an interview with Haim Bodek
Haim Bodek - an extraordinary figure for the financial world. After receiving a bachelor's degree in mathematics and cognitive science at the University of Rochester, he decided to devote his career development of trading systems and has made significant progress in this field. However, he created the company Trading Machines failed after trading algorithms under its control became ineffective. Bodek himself believes - because of the spread on the market of a special type of orders, who managed to jump his application in the general flow (the so-called queue jumping) - with the help of exchanges. With the submission of an American developer issue unethical norms in HFT-industry received wide publicity. As a result of the recently released American documentary "Wall Street Code", which Bodek sheds light on the industry of high-exchange algorithms, and exposes the evil, in his view, trading practices.
- Heim, you've already been to Russia?
- No, I first visited your country. The trip runs great, I feel pretty. I have something to compare: recently I was in Asia, and it always felt some stiffness. In Russia, in front of me opened up business opportunities.
- What kind of business are you talking about?
- I was an interesting, intense meeting with traders of your country. In general, I do consulting companies that need help with work in foreign markets. I have the relevant experience, as my work activity is mainly associated with options trading on international markets.
- How did you fall into HFT-business?
- Since the late 1990s, I am developing trading algorithms, mainly for the options market. At one time I worked for companies such as Hull Trading, Goldman Sachs (acquired Hull Trading), UBS. The Swiss bank, I was one of the heads of departments who trade volatility and market making on all US option markets. Then he created his own company Trading Machines. Its trading algorithms in the best of times wrapped up-half of the total volume of trading in the US options market. At the same time, I would not say that ran HFT-by or use-HFT strategy. I am more involved and engaged in the study of various HFT-practices.
For me, high-frequency trading is a kind of tradition, which already has its own history. This kind of trading reached a peak in 2007, between 2007 and 2010, he brought a lot of money, with the result that many companies specializing in algorithmic trading, began to ascribe to themselves the abbreviation HFT, although they do not engage in this practice after the fact.
- You-you traded hands?
- trades, but I'm still a typical "algoparen". I come up and run in 'The Fighter', but in actual combat them manage others. To be honest, I've seen good day traders, but I do not know of a single market maker that would be also a good trader.
- The modern high-frequency trading have any feature?
- The main difference between modern-HFT trading from the traditional is now in the process of building a high-frequency algorithms mainly focus on the desire to receive for your orders the best position in the general flow of applications. This is what I call "alpha". This nuance past 15 years, almost no attention has been paid in most traditional mathematical trading techniques.
It should be understood that for the modern-HFT traders core value is the most advantageous position for their orders. For them, it is just as important as the other - to book a table at a good restaurant for example.
Once in HFT-industry realized it (and it happened sometime in the early 2000s), all immediately began to look for ways to ensure yourself getting a better position in the queue of orders. Here, in the struggle to include such components as the speed and market microstructure - management system selection Exchange orders (order matching system), their setting and tripping.
All this has nothing to do with the mathematical trade types. This is a totally different dimension in trading, the fourth dimension, if you want. Three others - the traditional trading, technology and mathematical methods. Fourth Dimension prioritizes microstructure angle.
This nuance dropped out of sight of people, they do not understand. Normal trading systems developer or trader do not know anything about market microstructure.
The problem lies in the fact that many aspects of HFT-trading were incorrectly displayed in the media, and I'm sure it's even played into the hands of exchanges and HFT-players. Who wants to be the secrets become public domain? Published in the book? Speaking about today's high-frequency trading, journalists always put emphasis on information technology, the rate of iron, but it still can be reduced to IT. In fact, in the first place it is the microstructure of the market.
I repeat: when I talk about the microstructure, I mean how exchanges reduce and execute warrants. A method in which HFT-systems receive a comfortable position in the queue on US stock exchanges, longer dictated by the rules themselves exchanges than the connection speed, equipment and features of the infrastructure networks.
At the time I got to the front page The Wall Street Journal, when told regulators about the possibilities of exchanges with orders to maneuver, allowing some of them to pass the queue (queue jumping). It was into the hands of some HFT-algorithms, because they get a "jump" orders that were sent to the stock exchange even before they do.
In the end, it is not even in the speed and the ability to find holes in the bidding rules and regulation of the markets, which allow to make deals without interference.
It does not fit with the concept of "I'm the fastest and so do half a billion dollars a year." Some companies are not that fast. They just skillfully used gaps in regulation. Some of them can be circumvented quite legally, but others, in my opinion, is so difficult to detect that at times it is not the power of even the controller.
- This is a major problem?
- If the application "out of turn" would be absolutely legitimate, the Securities and Exchange Commission (SEC) would not waste time on two major investigations into these kinds of trade Commission. Many HFT-practices are unethical, but the question is, which ones really should be banned. As I understand, control and trying to figure it out.
At stake are big money. I estimate that about 40% of the trading volume of US stock market assets in one degree or another connected with this type of trading. It is understandable why these investigations last long: it's a big piece of cake.
-What kind of investigation?
- They are built around a debate on the types of orders (order type controversy). This point is the main object of critical attacks on the exchange. Like, some HFT-companies have certain advantages over other bidders, since they are provided with the possibility of issuing certain types of orders. Warrants have been developed in the strictest confidence to those who are supposedly "close relationship" with the exchanges.
History has passed into the public mainstream in 2011, and the first official statement of the regulator in this regard was made in February-March next year. Another significant event occurred a little later, when the test management and control of the Commission on the Securities and Exchange Commission (Office of Compliance Inspections and Examinations, OCIE) also announced the initiation of an investigation of these practices. In June this year OCIE announced that has completed the collection of the necessary information. I hope that we will see some results by January next year.
In my view, that the investigation HFT-practice began only relatively recently, it has "merit" of a number of companies that make huge amounts of stock. In the meantime, regulatory arbitrage, the use of loopholes in the law is the main component of the same "strategy", which I have already spoken.
By the way, it is indicative of the fact that a number of the company's key positions are occupied by former SEC lawyers. When these people start to manage a trading company ... I do not want to name names, but the difference between those offices and organizations, which stand at the helm of traders legend, visible to the naked eye.
So a trader, of course, may well be able to predict the market movement, but when, despite all his ability, someone would come, he can not do anything about it.
- You heard something about the history of Sergey Aleynikov who was accused of stealing code from GoldmanSachs?
- Yes, an interesting story came to him. Personally, we do not know, but on one of my first jobs, I was engaged in collecting data for the system, which was called "three-factor model." Aleynikov was accused precisely in the fact that he stole the code of the model. The problem is that, as recognized by one of my acquaintance traders, this model is more likely to steal on Wall Street.
One day I met a guy who wanted to work in the Trading Machines. He was at the time engaged in the development model, which, as it seemed, was a real know-how. After watching, I cooled the ardor of his, saying that this is the three-factor model. "You're with someone from Goldman Sachs worked?" - I asked him. "Oh, my boss. He was from Goldman ... »- he answered. In general, throughout my career I have encountered at least twice with the people who praised me this model.
Unfortunately, in the financial industry for intellectual property is treated with great disdain.
- The traditional question of the human world of finance: your most successful and most transactions failing?
- I have often seen people algorithms and lost 50 thousand dollars for 10 seconds or even half a day of profit earned. Once in 20-30 minutes, I lost half a million, and once managed to make a million dollars in a very short period of time. Of course, all this is done on a massive scale. At one time, the operation of my desk is made up to 10% of the turnover of US options market. When you say you are so significant amounts, such events occur frequently. In this game you do not need a superstar and past failures. If you earned a lot of money, which means that you hoisted on their shoulders excessive risk. Of course, it is better to contain both of these options.
I remember once our trading system is out of order, and we were confident that the trading algorithm also stopped working as the appropriate option was to turn it off. However, it turned out that the guy who was responsible for this very option, for some reason, it cut down, resulting in a half-hour unsupervised algorithm trade lost 400 thousand dollars.
Well, the most famous example is connected with the collapse of Knight Capital. It is known that their algorithms brought them $ 440 million of losses is less than an hour. Even though it is not even so much in comparison with the fact that they might lose even. In the case of Knight Capital I was shocked that they had an active correspondence with the New York Stock Exchange. They asked, they say, all you have to order with the algorithm, but no one in the company did not even bother to understand!
- Yes, when before my eyes there is such an example, it is unlikely to wish to appear to start their own business, especially in the HFT-industry. And when they came to the idea of opening your company?
- We organized Trading Machines in November - December 2007, we have been developing trading algorithms almost all of 2008 and started trading just 4 weeks before the financial crisis hit. At that time, we were able to scale their operations up 0.5% US option market turnover. You have no idea what it was nerve-wracking ... We normally worked until May 2009, after which we had the first problem: one of the exchanges dramatically changed the rules of the game.
- You can announce any results?
- We managed to pick up from the market more than 20 million dollars, but the bulk of the payments went to the commissions, and profit was not enough to cover the costs of maintenance of the firm, which is 10 million per year. Perhaps the algorithms that we used could contain a couple of guys, but they were not good enough for a large trading company. At the peak we employ 25 people.
The main problem arose after the market has spread the very practice of extraordinary orders, queue jumping. I myself would never have understood that this is what actually brought the game of my algorithm, if I had not been told about the existence of the special order types that can jump over other applications in the general stream.
- But there is a silver lining: you could probably get a positive experience.
- We hired people from the units competing companies. While all this was like the establishment of a dream team. But I realized that even if you have a good track record in investment banks, it does not mean that you will be able to show outstanding results.
The business environment is constantly changing, with the market unable to take less and less. We needed a more creative people who can easily adapt to the new situation.
But we must add that the Trading Machines closed, including due to the unfavorable situation on the options market. Perished not just us, some companies have also reduced their optional units, and brokers who have been leaders in this segment, received a loss from market making.
Structure of the market in general has changed dramatically over the past five years.
- Why, in your opinion, many left the market?
- Most people get hung up on strategies that have already begun to fail. Everyone in this business tend to be innovators, but most use the same algorithms that are simply trying to do something better than others. Create a new strategy is extremely difficult, especially when the regulatory environment and market conditions change every two months.
- What do you spend the time now?
- I have lots of projects. I am developing new strategies, I advise a number of companies trying to create a synthetic platform includes all - risk management, operations, back-office. However, preference is given to me all the same creation of a fund under the control of its own algorithms. Yes, I want to say that the lessons I learned Trading Machines.
At the same time I was doing a lot of community work, in every way seek to warm up the debate around the market microstructure.
- Why do you need it?
- When I started a campaign against the illegal, in my opinion, trade practices, I thought that the players of the financial industry will stand on my side, will publish, disclose any facts.
Expectations were met only partially. Legal departments of large financial institutions on the part of customers and banks and the stock exchange, on the other - all are closely watching the process and waiting to see what will happen next.
We have a systemic problem, but it is not so easy to solve. It is not enough to exclaim: "Hey, guys, come illegal actions, can not you see ?!" In this game involves imposing forces that seek to maintain the status quo. At the same time, many companies are interested to find out how the money goes out of their nose, many just want to SEC that has already started to do.
- And what, in your opinion, HFT-moving industry?
- As long as there is economic sense to compete in a battle-HFT algorithms, the industry will continue to exist. All these companies are fighting for the right to, figuratively speaking, the first to come from the back patio. If it did not exist these same back door, which I have mentioned, there would be no economic sense to hire people to go all the volume of work. Understand, if all of them get to knock on the front door, the HFT simply die out.
- Do you have a familiar Russian traders on Wall Street?
- Somewhere in the mid-2000s I became involved in the process of building a team. From about this time their composition has become a serious change. If in the late 1990s and early 2000s it was still a high proportion of technicians - a kind of tribute to the days of the dot-com heyday, then after the mid-2000s universities have modified their programs and students have lost some of the technical skills required to do business.
Among developers of trading systems many Chinese, Russian, and citizens of other CIS countries, Indians. Even in my company Trading Machines Russian and Chinese were the main ethnic groups. I always had to take into account the cultural characteristics, to establish constructive interaction. Sometimes it was not easy.
My father, who dealt with the physics of elementary particles, working as a team, composed of different ethnic groups. All of them were technical people, the wisest men - and all of them he had to adjust to working.
I'm always interested in visiting the country, the citizens of which I've worked.
- That is, in China, too, has already visited?
- Yes. I also suggested to visit Hong Kong a few weeks ago, but the Russian embassy have retained my passport too long ...
- Have you ever traded on the Russian market?
-No. I do before going to your stock market had some concerns, but I was pleasantly surprised by the structure of the Russian market. My main message: you have a good, solid base, but no matter what you were going to take, be very careful not to repeat the mistakes of other markets.
For example, it is not necessary to expand opportunities to create artificially high volumes. This includes the excessive growth of all kinds of orders. In fact, it will do no good and do not need to build a mature market.
At the same time you need to do a lot of work for the development of institutional investors.
-Not in all of us should be on America?
-American stock market is a real example of how competition, which should in theory be useful, in fact, causes harm to the environment.
In the US there are 13 stock exchanges. In the struggle for the client of their work was like the appeasement of their pets. When you give customers the opportunity to place their equipment in the data center by introducing reduced commission - it is justified and correct. But to churn out various types of orders, which are de facto look like they are set under the trading practices of certain firms - is inappropriate.
As soon as the market begins to affect the process of determining the winners and losers in the market struggle, it has a negative impact on the overall situation.
I suppose it comes from the fact that the exchange does not know how to position themselves, and as a result they begin to adapt to certain customers. For example, in the United States does the new Exchange IEX, which is kind of more convenient for pension and mutual funds. But again, this is one of the forms of assistance, as market supposedly protects these companies from HFT-strategies.
In general, it is clear that the situation has gone too far. Actually, from what I'm trying to fight.
Exchange must provide open and fair market access to all players. Once they start to look towards one group of customers, then, in my opinion, starts to deviate from the basic principles of the law of the exchange activity of 1934.
- You never wanted to drop everything and leave the world of finance?
- Throughout his career, I do automate trading systems. My job is to replace people algorithms. I would be happy if the business declined, however, to my surprise, in this industry is working more and more people, in fact all that might fill the workers only a dozen offices. But it's better to let others return to the science, but I'll stay in this area and more work.
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